Bitcoin's Four Hurdles: Part Four – Exchanges

In my final post about Bitcoin’s four hurdles, I will be covering exchanges. This may be the most visible point of Bitcoin’s growth pains.

Today, MtGox is not just the major Bitcoin exchange. For all intents and purposes, it is the only Bitcoin exchange, having one-hundredfold the trade volume of the second-largest US dollar exchange.

BITCOIN’S FOUR HURDLES
This is an article in a series on what Falkvinge identifies as Bitcoin’s four hurdles, which will be followed by a series on Bitcoin’s four drivers. This is the fourth article, on exchanges. The others are usability, transactions, and escrow.

I would argue that nowhere is the Bitcoin growth pains more apparent than at MtGox. It appears to be a quick hack site, entirely robust and quite functional, but with a strong touch of “let’s build a prototype” over it (which ties back to my first hurdle post about usability).

But disregarding the appearance, everything about MtGox says Bitcoin is in growth pains. I am sure that it is quite profitable by now, taking a 0.65% cut of a monthly six-million-dollar trade. Congratulations are certainly in order.

But when entertaining that kind of trade, I have different expectations. When seeing bitcoin prices rise in seconds-fresh updates, I want to react on that within minutes. Instead, the best I can do is to transfer legacy-currency funds to MtGox using an intra-European SEPA wire transfer, which takes two to five days.

This isn’t even funny. It files under “are you kidding me?“.

Given that the Bitcoin economy is valued at USD 200 million by now, the largest exchange should be holding its own accounts in all major banks and monitor them on automatic to enable immediate transfers. And I do mean immediate. This is just a source of frustration at present. If not having own accounts, it should have an affiliate program for that so that immediate transfers are possible.

It gets worse.

Despite the banner on MtGox saying that anyone can withdraw their funds at any time, this turns out not to be true when you try. You’re not allowed to withdraw more than $1,000 of worth per day or $10k per month, unless going through bureaucratic hoops, in which case the limit may — may — be raised. Apparently, this is due to a regulatory requirement if MtGox wants to stay as a low-volume something.

This, too, files under “are you kidding me?“.

The demand for moving millions of dollars or euros in minutes without interference is one of Bitcoin’s key drivers. In this huge opportunity to change the world forever, the largest exchange takes up to five days to move USD 1,000 worth because of legacy-banking regulatory bullshit? This inertia is the single largest obstacle for Bitcoin growth and uptake at the moment.

I would expect the largest exchanges to either be based in jurisdictions where no such regulatory requirements apply, or to have met the demands to not have any ridiculous roadblocks. I expect nothing less than total by-the-second liquidity between Bitcoin and other currencies.

Now, this article may look like a lot of MtGox bashing. It is important that MtGox does not deserve any criticism at all for being worse than everyone else. Not at all. And that’s a major part of the problem. MtGox is dominant for a reason, being the currently best exchange, despite these showstopper-grade shortcomings.

I chose to highlight MtGox because it gave me an opportunity to describe the best exchange by two magnitudes of volume and why it isn’t nearly good enough. And that’s why I’m saying that the Bitcoin ecosystem badly need exchanges. Many of them.

MtGox is totally dominant in Bitcoin today, just like MySpace once was in social networking. It remains to be seen whether it becomes the MySpace of Bitcoin. MtGox has huge momentum and networking effects speaking for it, but is not at the level where it needs to be to meet demand. We’ll all soon know whether it can innovate fast enough to keep its networking effects, or whether new, aggressive and polished-facade exchanges like TradeHill can compete for the top spot.

In any case, we don’t need one good king-of-the-hill exchange: we need many exchanges. And we need interoperability between them to further augment the networking effects. History shows us that Walled Gardens lose every time; the first two exchanges to link up their buy-and-sell orders through an open protocol are going to get an immediate headstart over everybody else due to fourfolding the networking drive. That will, hopefully, drive an interexchange protocol.

This article ends my series on the four key hurdles of Bitcoin. In two days, I will publish the first article on Bitcoin’s four drivers (and a surprise opportunity). That’s going to be much more fun writing and reading.

Rick Falkvinge

Rick is the founder of the first Pirate Party and a low-altitude motorcycle pilot. He works as Head of Privacy at the no-log VPN provider Private Internet Access; with his other 40 hours, he's developing an enterprise grade bitcoin wallet and HR system for activism.

I think you are all completely wrong and do not think consequently right to the end about what it means to establish an alternative currency or money system: it means that the new system has to be completely UNCONNECTED to the old system. So therefore it should have NO EXCHANGES to old fiat money, as this intruduces a foreseeable intrusion of the most yukky offscum kind of capitalists – the money traders, that belong to the group of worst “money-for-nothing” freeriders of our global currency system – these people are definitely without any benefit for the world and opening a money system to these will destroy it.
But take it the other way around and understand, why something like bitcoin, to be really successful, has to AVOID having an exchange with fiat money – if there is no way to make “real dollars” with cryptomoney, the financial sector scum people will not be interested in this and in the end all value of the crypto-currency will be backed only by real-world-value – and a real alternative oeconomic system can develop out of the scope of fiat-money-manipulators.
So your conclusion should be: bitcoin should NOT have any exchange, never ever! Exchange your bitcoins against real value, and that will built an oconomic system that will be a strong weapon against the mafia and their submissive bankerboys. On top you get a system, that will be absolutely unfightable by any government, as it is obvious that at the point when the system will be dangerous for the old school suppressive system the exchanges will be closed or operated by state agencies itself to take control.
Really simpel: no exchange = real weapon!

Rick is over-criticizing Bitcoin. I can agree these are the four problems of Bitcoin, but they are not crucial and not even important that much… I absolutely agree it’s not that much important to exchange Bitcoins for regular currencies that fast, Bitcoin has it’s own economy and you can buy something instead.

I’m into Bitcoin for few months now, and from everything I’ve read, I can conclude Bitcoin is honest, good system, which will be able to solve future technical problems with scalability. It’s opensource and no government can stop it. That’s the whole beauty of it, criticizm is good – but the key problems are solved with Bitcoin and given the fact it’s first serious crypto-currency still with no serious competitor, I think hardly any other system could replace it or even compete with it. Something comparable to nowadays popularity of Paypal. It’s Paypal’s equivalent in normal world of normal money.

Yea – ditto Britcoin.co.uk – a British variant. It started out well enough… but the fact that it has just taken them about a week to transfer £500 has cost me… £500.

It’s a pioneering service that they’re offering I guess… but the demand has instantly swallowed them whole, and now really does need them to be a little faster than they currently are.

Currency speculation aside, I also sell physical products for bitcoins… and have had at least one person “just give up” when they find out how much hassle it is to participate.

I’m a programmer – so I guess the answer is “stop moaning and get programming”… but… um… I can’t see myself getting it together to be honest. Something like this does need resources…. of the sort that Skype deployed back in the day.

I was pre-investigating a Dutch “buy bitcoins with iDeal” service. iDeal is “standard” supported by all banks in .nl to pay online. I gave up. In order to get this from the ground, in proper way, like you envision it, you need your feet planted high up in the traditional banking world.

Before professional exchanges, as you describe them, can be set-up, we need jurisprudence. We need large budgets to fight lawsuits against “trads” such as paypal, creditcard corps (or iDeal0 who are holding off BTC. To force them to support fund-transfers to BTC traders.

We need lobbying with banks and law-makers. With “umbrella” orgs such as the ones who provide payment-transfers like iDeal, moneybookers and such. And banks need to see Bitcoin as something real. This will probably first become worst when banks realize Bitcoin is real and eating into their businessmodels and then will start fighting it. Currently they can still simply ignore it. Very similar to the entertainmentbusiness versus distributed “pirates”. These worlds simply could not and cannot (yet) communicate to get professional, legal services online. Other then some crippled iTunes and spotify as alternatives for p2p.

In short: exchange between a central system and a decentral one, require coöperation between that central, protected, walled culture and the decentral, loose culture of individuals. That is a mismatch. And a catch22: unless the BTC economy grows, becomes professional and contains large amounts of investment-capital, lone developers, and enlightened economics can only improve the BTC-side of the exchange-system. But cannot do much about getting “classic” money in and out of BTC. But the BTC economy can only grow really large, unless those centralised “trads” coöperate in this decentral network of individuals.

ANNM

June 10, 2011

Are these limitations really that important if you use Bitcoin mainly as a currency for transactions rather than mainly for currency trading? In the former case you would probably keep a couple of hundred or thousand bitcoins in your wallet and refill it now and then, like you do with a debit card, and it doesn’t really matter if it takes a couple of days. In the latter case, well, do we really want a currency that is mainly used as a trading instrument?

Rick Falkvinge

June 10, 2011

In the final phase, when transactions are made in Bitcoin, exchange may be less relevant.

But for uptake, it is absolutely crucial. We cannot peddle Bitcoin using the advantage “it takes just minutes to transfer millions” when in reality it takes five days to transfer USD 1k.

walter

June 12, 2011

Aye, there’s the rub. If bitcoin is supposed to be the new currency that takes over the world, it’s main focus should be on getting people to adopt it as a medium of exchange, instead of worrying about how it trades against other currencies. However all the talk online is about how to ‘mine’ these coins or how to exchange them back and forth into other currencies. So far you still can’t buy anything useful with these bitcoins (unless you consider crack cocaine or child pornography useful).

Gaborone

June 10, 2011

I agree with you, but this argument makes no sense “When seeing bitcoin prices rise in seconds-fresh updates, I want to react on that within minutes.”

How do you want to react to rising prices? I thought you had all your money in bitcoin already. If you want to make money by short-term trading, i.e. selling before the price falls and buying before it rises, you don’t need bitcoin, You can trade other currencies and commodities. But I suppose that if you were a good short-term trader, you would have FU money, and you wouldn’t have to bet all your money on the rise of bitcoin.

I agree that for bitcoin to succeed it needs to be readily exchangeable into other currencies, but the argument you used is wrong.

Rick Falkvinge

June 10, 2011

Hmm.

I read your response here as though I was literally refering to what I want to do (and yes, I have indeed converted all my static means to bitcoin — I still have dynamic means to pay for everyday food and such, of course).

When I say “I want to be able to do this” in this context, that should probably more accurately be read as “I expect key driving people will want to be able to do this”.

>Given that the Bitcoin economy is valued at USD 200 million by now, the largest exchange should be holding its own accounts in all major banks

Thank you, Captain Hindsight!

A few weeks ago, it was just a fraction of this. You do realise that this takes time to set up, right? In order to have this up and running by now, they would have had to start this process weeks or months before they actually needed it.

>In this huge opportunity to change the world forever, the largest exchange takes up to five days to move USD 1,000 worth because of legacy-banking regulatory bullshit?

Yes! This kind of “bullshit” is exactly why Bitcoin was created! Performing actual Bitcoin transactions has no such limitations.

Rick Falkvinge

June 10, 2011

Thank you, Captain Hindsight! A few weeks ago, it was just a fraction of this. You do realise that this takes time to set up, right?

Yes, of course. But having managed a swarm, I can also say that it need not take more than about a week to reach 90% coverage of, say, a target of the three largest banks in all EU, North American and South American countries.

It would take months if and only if you insisted on doing everything yourself.

Before you dismiss this as unrealistic, do consider what the Pirate Party has accomplished on zero budget. I have achieved a fairly good sense of what can and cannot be done swarmwise, and about how long it takes.

Yes! This kind of “bullshit” is exactly why Bitcoin was created! Performing actual Bitcoin transactions has no such limitations.

I know. But in order to get there, there must be grease in the transition.

I trade on IRC at #bitcoin-otc (high off-topic traffic) or #bitcoin-pit on Freenet. Direct person to person trades, no fees and no limits. A system of GPG authenticated web of trust where you can rate the pepole you are trading with and check if people can be trusted.

I have been thinking of setting up an exchange in my own country, but it is a big risk to take. Bitcoin is in a legal vacuum. It isn’t a currency or money or even means of payment per ancient legal definition, and may be subject to VAT because more or less everything else is. (Money and paper books are the only exceptions.) It would be very silly to have VAT on Bitcoin, but I’m not going to take that fight against the tax authorities.

Yeah, nice outfit but only accepts usd, and pen (by the way I just googled it and it seems to be the Peruvian Nuevo Sol). A new and instant exchange should at least be able to handle USD, EUR, GBP, CHF, RUB, AUD, CAD, NZD, JPN, HKD and CNY. Everything else is not really helping. For exchanging “instantly” USD you can use the dwolla-MtGox-combo for example. It is crucial that especially the European traders can exchange local fiat for btc asap. If no solution is to be found within the next few days this might not be the fourth but final hurdle for bitcoin! Once momentum is lost it won’t be easy to gain back! I really hope MtGox is working on that!
Let’s hope for the best.

Elmo

June 10, 2011

TraeHill is trying to support several currencies directly, and it’s asking for others to setup bank connections as partners (for a piece of a growing pie), but as said, it has it’s risks regarding laws. But easy money otherwise.

Brazos

June 10, 2011

It’s look like Bitcoin already has reached it’s maximum value of $30 and falls back. There is no more such thing as walk in, wait and cash out a free lunch. The most volume on exchanges will be daytraders for now on.

Rick Falkvinge

June 10, 2011

Just like when it reached its maximum values of $3 and $9, respectively?

Brazos

June 10, 2011

The increasing value of Bitcoin is based on mentions by media. As you know such things does not last long if repeated. Remember Spectrial I and II and Pirate Party.

Rick Falkvinge

June 10, 2011

@Brazos: I like hard, visualized data. This particular data set says interest in bitcoin is increasing, despite being past a local media peak.

> the best I can do is to transfer legacy-currency funds to MtGox
> using an intra-European SEPA wire transfer, which takes
> two to five days.

I know, right? And on top of that, my retard bank couldn’t even move my money to my EUR account any faster than TWENTY-FOUR HOURS after I requested it.

All the retards had to do were 3 simple arithmetic operations:
* subtract amount A from account #1
* multiply amount A by the EUR exchange rate to get amount B
* add amount B to account #2.
It should’ve finished a few seconds after I pressed the button on the web interface, but nooooo.

Rick Falkvinge

June 10, 2011

And for keeping these few stupid numbers in a database, and not being able to serve us to a fraction of what we need, they ACTUALLY CHARGE US MONEY.

No wonder this will kill the banks.

walter

June 12, 2011

Yeah I’m sure the banks are just terrified of a currency that is designed to be massively deflationary and is only used to purchase illegal drugs and child pornography. Fight the power!

Gaborone

June 11, 2011

I have the impression that bitcoin is on the verge of getting massive coverage from mainstream media. If bitcoin was the internet, we would be in 1993 today (One year ago, we were in the 1960s). Once the value of all bitcoins goes to 500M, we will be in 1994, and a 1B value would be an event similar to the 1995 Netscape IPO. What do you think?

You are spot on in this text, even if the matter is rather obvious. There could be real trouble exchanging any currency into bitcoins if governments worldwide really make an effort to stop it. They could practically force banks and transfer houses like Visa and Mastercard to aggressively monitor for accounts and online shops accepting credit card payments. Then how would people get funds over to bitcoin? Ironically bitcoins are very dependant of other “real-world” currencies, banks and transfer houses. It may also go the other way: bitcoins are accepted in ever-greater numbers and there will be no major problems for this currency to take off.

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